Jamaican Central Bank To Raise Interest Rates Amid Above-Target Inflation

• The Bank of Jamaica (BoJ) is expected to hike its benchmark interest rate by 75 basis points (bps) to 2.75% by end-2022, as inflation will remain above the BoJ’s target inflation range of 4.0% to 6.0% over the coming months. The bank hiked its policy rate by 50 bps, to 2.00%, in its November meeting, in line with Fitch Solutions’ forecast of a 2.00% policy rate by the end of this year. The BoJ stated that the decision was made primarily to combat rising inflation, which reached 8.5% y-o-y in October. 
• It is expected that relatively elevated prices of agricultural goods and oil will drive average inflation to 5.6% in 2021 and 6.3% in 2022. 
• Although it is expected that prices for agricultural goods will reduce in the coming quarters as the short term shock to agricultural supplies caused by tropical storms Grace and Ida in August subsides, elevated transportation and shipping costs, coupled with supply chain bottlenecks, will continue to fuel inflation through 2022. Inflation expectations are also rising. The BoJ’s October Inflation Expectation Survey shows domestic businesses also expect elevated prices, projecting an 8.2% rise in inflation in the next 12 months, compared to 7.4% in the September 2021 survey. 
• Persistently above-expectation inflation could convince the central bank to increase rates more aggressively in 2022 than currently anticipated. In its public statement following the September 2021 meeting, the BoJ noted that inflation breached its inflation target earlier than expected. Should inflation continue surprising to the upside in the coming months, Fitch would expect the BoJ to respond with a more aggressive set of interest rate hikes than currently forecasted.
• That said, the emergence of the Omicron variant could threaten Jamaica’s economic recovery and pose a downside risk to monetary forecasts. Jamaica’s vaccination rate remains low, with just 23% of the population having received at least one dose as of December 5, while the new Omicron variant is driving rising caseloads elsewhere in the world. Should cases rise in Jamaica, it could lead to the re-imposition of public health restrictions, which could undermine the economic recovery, but stymie inflationary pressures reducing the need for aggressive rate hikes.

(Source: Fitch Solutions)